On Sept 24, 2019, the IRS released Rev. Proc. 2019-38 finalizing the rental real estate safe harbor for the 20% pass-through deduction. While some taxpayer-friendly changes were made, the requirements for contemporaneous recordkeeping by service providers and the exclusion of triple-net leases mean many real estate developers won’t use it.
The 20% pass-through deduction applies to income of a “trade or business,” which was not defined in the tax reform law. Despite efforts by ICSC and the real estate industry to apply a broad definition, the IRS adopted a narrower standard under section 162 of the tax code that requires regular and active involvement in the enterprise.
Though triple-net lease property does not qualify for the safe harbor, it may nonetheless be eligible for the 20% deduction, depending on the individual facts or circumstances of the taxpayer.
Favorable factors include:
- Owning multiple properties
- Providing additional services under the lease
- Spending substantial time managing properties
- Regular involvement by the owner or the owner’s agents
One positive change: the IRS said that mixed-use property can count as one real estate enterprise.
Phillips Hinch
Vice President, Tax Policy